Aladdin’s Corner: How do you measure a Feeling?
There was a question about how much to adjust for a slab home in an investor FB group.
Headline: Appraiser answer = ~ 4%.
Sub headline: how do you measure a feeling?
The answer really depends so many variables but here is where that one specific ~4% answer came from.
I appraise Real Estate in the Greater Boston Area. After the ’09 crash I used the free time (no work) and learned regression analyses. I then used that to determine values of various characteristics in homes.
I downloaded 10 years of single family sales in Newton (6,000 sales +/-). I move on to Cambridge Condos and also in Natick and Framingham I studied Campanella slab ranch homes with no basement on level lots.
This Metro West real estate market was a great find because, unlike most of the Greater Boston Real Estate Market, this market has so many sales of “the same home” again and again with minor differences.
That makes it easier to figure out verifiable market values for various characteristics I was studying (bedrooms, bathrooms, sq.ft., patios, garages, baths etc.).
After scrubbing the data I compared slab ranches which are all on level lots, to basement ranches also on level lots. The basement ranches have the typical tiny awning windows, not embankment lots, and all their basement were unfinished . I just wanted to isolate one characteristic, the presence of a basement.
After removing the outliers, I discovered that the presence of a basement added from 2%-4%.
Appraisers are all at the mercy of the market consisting of whatever closed sales have occured. In an appraisal I will strive to use only slab homes when appraising a slab home.
I will go back 2 years looking for data to figure out the value. I may not use an old sale but will let it shape my opinion then I look for recent sales in that price range to support my value in the appraisal report.
I will also look at cancelations and expired listings which give me a potential value ceiling.
When I must mix slab and basement sales in the same appraisal I almost always adjust 4% for the slab. Of course there is more adjusting to compensate for a home has a finished owned/or embankment basement, but I would almost never include a walkout finished basement home to slab home.
The method I used was regression analysis in excel but there is software out there that does the work for you. I have no affiliation with any of them but we are about to play with Redstone which extracts MLS data for you then provide a set of regression tools. There are others out there as well.
Appraisal is a blend of art and science. These measurable percentages are “the science” of valuation. “The art” is in recognizing that feelings matter. That on any given weekend there may be a glut or dearth of homes competing for the same buyers (comps) and that variable will amplify or diminish the percentages I use.
Every day buyers shopping for homes are facing an ever-changing menu, in an imperfect market, and throw emotion into the soup and people buy based on a feeling. How do you measure that?
There is probably no exact answer to any value question and yet appraisers must state an opinion of value backed up by verified market data.
We have 3 approaches to value in real estate appraisal.
The income approach (investors!)
The cost approach (land + construction – depreciation)
The sales comparison approach to value (adjusted and weighted sales prices of comparable homes).
Some appraisals are easy and the value obvious. Sometimes I end up close to minimum wage.
In the end I think that in challenging cases what appraisers really do is best described as a 4th approach to value, the Scientific Wild Assed Guess Approach (S.W.A.G ).
It is a feeling based on the total mental immersion into the market for the home. It is hard to teach and not quickly attainable, but I’ve competed over 4,000 appraisals worth over 2 billion dollars and I got it somewhere along the way.
In my opinion it may be the most important and hardest part of valuation to learn.
Best of luck!
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